Do Formal Loans Boost SME Performance ? Key Takeaways from a Meta-Analysis

Overview & Synopsis

This paper conducts a meta-analysis of 24 studies evaluating the impact of formal loans on small and medium-sized enterprise performance. Using a Bayesian hierarchical model, the paper estimates that formal loans increase small and medium-sized enterprise employment by 12 percent, sales by 18.3 percent, and profits by 17.6 percent. Subgroup analyses show that the effects of credit on employment are larger when loans are issued by public rather than private banks, and the effects are broadly similar across firm size, country income levels, and guarantee structures. The larger impact of public bank loans suggests that private lenders’ profit-maximizing incentives may not always align with providing funds to the most credit-constrained firms that have the highest returns to capital.